The Indian rupee could fall below 26 against the UAE dirham or reach 90 per US dollar this year as the Reserve Bank of India (RBI) is likely to ease its control over the currency under the new governor.
Recently, the rupee has dropped to record lows, reaching 23.689 per dirham and 85.97 per dollar, raising speculation that the RBI might relax its tight grip on the currency under Governor Sanjay Malhotra. Previously, the rupee was effectively tied to a gradual peg against the dollar under the former governor.
On January 10, the rupee reached a record low of 86.04, closing at 85.9728 against the dollar, according to Bloomberg data. The decline in the currency is due to ongoing outflows from foreign institutional investors (FII), high demand for dollars from oil importers, rising Brent crude prices, and increasing US Treasury yields.
A sharper drop in the rupee could create problems for India’s economy, which relies heavily on imports, especially with higher oil prices. However, experts believe that in the long term, a weaker rupee might help improve trade balance and support India’s growing export sector.
A weaker rupee could also benefit Indian expatriates sending money back home, as they would get more rupees for their foreign earnings. While this could temporarily help household incomes in India, if the rupee weakens to 95 against the dollar, it could have serious effects on the country’s economy.
Analysts Udith Sikand and Tom Miller from Gavekal Research expect the rupee to depreciate further, possibly reaching 95 against the dollar this year. They also believe the Reserve Bank of India (RBI) faces the challenge of lowering interest rates without causing a larger decline in the currency.
In their report, Sikand and Miller suggested the rupee could fall by up to 10% as the RBI moves towards a more flexible exchange rate. While a weaker rupee may put pressure on the economy initially, they think it could eventually help India’s export sector by adjusting an overvalued exchange rate.
Since late 2022, the RBI has tried to control currency volatility by managing the rupee’s exchange rate with the dollar. This helped build up foreign exchange reserves, which reached a record $704.89 billion in September 2024. However, with the rupee now depreciating sharply, reserves have dropped by about $70 billion.
Monetary experts say that moving to a more market-driven approach could cause more fluctuations in the rupee’s exchange rate. While this might allow the currency to adjust according to economic factors, it could also create uncertainty for businesses and investors.
Allowing the rupee to weaken further could have mixed effects on inflation and economic growth. A weaker rupee might make exports more competitive, helping growth. But it could also raise inflation, especially for imported goods.
The RBI’s foreign exchange reserves have acted as a buffer against currency fluctuations. However, if reserves continue to fall due to interventions or capital outflows, the RBI may struggle to stabilize the rupee during market pressures.
A weaker rupee would increase the cost of imports, especially oil, which could drive inflation. This would challenge the RBI in managing both growth and inflation.
While a weaker currency could make Indian goods more competitive in global markets and boost exports, it might also raise costs for industries that rely on imported raw materials.
Depreciating the rupee could also affect investor confidence, causing more volatility in equity and debt markets. This might discourage foreign investment and harm overall economic stability.